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IRAs

Think twice before converting to a Roth IRA to avoid RMDs

Dan Moisand,
a Principal at Moisand Fitzgerald
Tamayo, LLC in Melbourne and Orlando, Fla., is one of the financial
planning profession’s most respected practitioners advising retirees and near
retirees. Dan’s thoughts can be found in bylined articles in most major
publications for financial planners and a slew of financial planning related
publications have featured him as one of America’s top advisors and was recently
named one of
"15
transformational advisers" by InvestmentNews. A past national
President of the Financial Planning Association (FPA), his service to the
profession includes three years on the CFP Board of Practice Standards crafting
the standards to which all US CFP’s must adhere and serving as Chairman of the
CFP Board’s Discipline and Ethics commission, the body that judges complaints
against CFP licensees. A frequent presenter at such events in the U.S., Dan has
spoken to planner groups on five continents and in recent years has led
delegations of U.S. planners to Russia and China on behalf of the FPA.

Knowing what tax bracket you’ll be in when you start required minimum distributions is key.

Unlike traditional IRAs and retirement plans, your Roth IRA isn't subject to required minimum distributions starting at age 70 1/2. This can make converting tempting, but is is wise?

Q.Mr. Moisand: My wife and I are 61. I will be retiring in 2 ½ years at 64. Should we be converting NOW to Roths to reduce RMD's in the future or just let it ride? We are currently in the 15% tax bracket but any conversions will move us into the 25% or higher bracket. Also I am hearing we cannot convert after I retire because I no longer have earned income. Just curious about whether conversions and paying the Tax now makes since. Pay me now or pay me later? Thank you for any feedback you could provide. — Kim

A. Kim, for the next nine years or so, you can convert whatever you want whenever you want, even after you retire. You don't need earned income to convert.

Pay me now or pay me later is right. Converting is a good strategy if the money will be taxed at more than 25%. To determine that definitively, you will need to know what tax bracket you will be in when you start required minimum distributions (RMD) and what bracket will apply to your beneficiaries when they distribute funds to themselves. Lacking a working crystal ball, we have to estimate these tax brackets.

One way to do this is to take current law and extrapolate today's structure into the future. Under current rules, your first RMD will be about 3.7% of the value of your retirement accounts at the beginning of the year in which you turn 70 1/2. Ten years later, it will be about 5.5% of the account value at that time.

Add the taxable amount of that RMD to your other income sources like taxable Social Security, pensions, dividends, and interest. Then subtract your estimate for your deductions and exemptions and compare that to the tax tables. You should inflate the numbers in the tax tables to account for inflation indexing.

Keep in mind a few things, the year after you or your wife dies, the survivor will start to file as a single taxpayer and use a different scale. After both of you are gone, your heirs will pay based on their households. So, if your daughter is a high-income professional, she may greatly appreciate you paying taxes at 25% instead of her paying at a higher rate.

Q. I am trying to figure out my kid's RMD for their inherited IRA. My wife inherited her mother's IRA in October 2013.The RMD was done for 2013. My wife passed away July 2014 (57-yrs. old). The IRA is inherited by my two college aged kids and has been set up as individual inherited IRA's for each of them. I am trying to figure out their RMD's for 2014. Is it still based on the grandmother? Is it now based on their mother? Is it based on them? — G.M.L.

A. G.M.L., I am so sorry about your wife. 57 is awfully young. The children stay on the same required minimum distribution schedule your wife was using when she died.

Dan Moisand's comments are for informational purposes only and aren't a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

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